Measuring GDP

1. Measuring GDP Mr. Henry AP Economics

2. Why GDP? • Just as a business would analyze their accounts to determine their health as a business, so too does our country • The Bureau of Economic Analysis (BEA) compiles the National Income and Product Accounts (NIPA) for the U.S. economy

3. From the BEA, we can: • Asses the health of the economy by comparing levels of production at regular intervals • Track the long-run course of the economy to see whether it has grown, been constant, or declined • Formulate policies that will safeguard and improve the economy’s health

4. The GDP • Our GDP is based on our aggregate output, or the dollar value of all final goods and services produced within the borders of a given country during a given period of time, typically a year • GDP is a monetary measure, so we compare the values of the vast number of goods and services produced in different years.

5. Wait…can’t something be counted twice?? • GDP must count items only once, so to avoid counting twice we count only final goods, not intermediate goods. • Intermediate Goods are goods and services that are purchased for resale or for further processing or manufacturing • Final Goods are consumption goods, capital goods, and services that are purchased by their final users, rather than for resale or for further processing or manufacturing • This avoid multiple counting and distorting the GDP!

6. Value added is the market value of a firm’s output less the value of the inputs the firm has bought from others. $120 (VA = $120) $180 (VA = $60) $220 (VA = $40) manufacturer Total Sales Values = $1140 Value Added (Total Income) = $350 So for the GDP, we could use the final cost of the item, $350 at Hollister, or the Value Added $270 (VA = $50) wholesaler $350 (VA = $80)

7. Intermediate or Final Good?

8. There are two ways to measure GDP • We can determine GDP as the value of output by summing all expenditures on that output • Or, we can determine GDP by adding up all the components of income arising from the production of that output

9. Expenditures Approach • To determine GDP using the expenditures approach, we add up all the spending on final goods and services that has taken place throughout the year.

10. Personal Consumption (C) • Personal Consumption Expenditures covers all expenditures by households on durable consumer goods, nondurable consumer goods, and services.

11. Gross Private Domestic Investment (I) • (I) includes: • All final purchases of machinery, equipment, and tools by business enterprises • All construction • Changes in inventories (unsold goods)

12. Government Purchases (G) • Government consumption expenditures and gross investment • Expenditures for goods and services that the government consumes in providing public services • Expenditures for publicly owned capital

13. Net Exports (Xn) • Foreign spending on our exports must be included in GDP • HOWEVER, some expenditures for C, I, and G are for domestically produced goods and services! • So, we must subtract off the spending that goes to imports, (M). • GDP = C + Ig + G + X-M or GDP = C + Ig + G + Xn

14. As was the case in 2002 and in your book table 24.3, notice that net exports are minus

15. AP Sample Questions • Please review the AP Sample Questions on GDP and keep them in your notebook!